12-1 Aggregate Planning

Operations Management

William J. Stevenson

8th edition
12-2 Aggregate Planning

Chapter 12

Aggregate planning
12-3 Aggregate Planning

Planning Horizon
Aggregate planning: Intermediate-range
capacity planning, usually covering 2 to 12 months.
The goal of aggregate planning is to achieve a
production plan that will effectively utilize the
organization’s resources to satisfy expected
demand.

Long range

Intermediate
range
Short
range

Now 2 months 1 Year

12-4 Aggregate Planning

Overview of Planning Levels

Organizations make capacity decisions on three levels:

• Short-range plans (Detailed plans)
• Machine loading
• Job assignments
• Intermediate plans (General levels)
• Employment
• Output, and inventories
• Long-range plans
• Long term capacity
• Location / layout
12-5 Aggregate Planning

Planning Sequence
Figure 12.1

Economic,
Corporate competitive, Aggregate
strategies and political demand
and policies conditions forecasts

Establishes operations
Business Plan
and capacity strategies

Establishes
Aggregate plan
operations capacity

Master schedule Establishes schedules

for specific products
12-6 Aggregate Planning

Overview of aggregate planning

• Aggregate planning begins with a forecast of aggregate
demand for the intermediate range.
• This is followed by a general plan to meet demand
requirements by setting output, employment, and finished-
goods inventory or service capacities.
• Managers must consider a number of plans, each of which
must be examined in light of feasibility and cost.
• If a plan is reasonably good but has minor difficulties, it
may be reworked.
• Aggregate plans are updated periodically, often monthly, to
take into account updated forecast and other changes.
12-7 Aggregate Planning

Aggregate Planning Inputs

• Resources • Costs
• Workforce/production rate • Inventory carrying
• Facilities and equipment • Back orders

• Demand forecast • Hiring/firing

• Policies • Overtime

• • Inventory changes
Subcontracting
• Overtime • subcontracting

• Inventory levels

• Back orders
12-8 Aggregate Planning

Aggregate Planning Outputs

• Total cost of a plan

• Projected levels of:
• Inventory
• Output

• Employment

• Subcontracting

• Backordering
12-9 Aggregate Planning

Aggregate Planning Strategies

• Proactive
• Involve demand options: Attempt to alter
demand to match capacity
• Reactive
• Involve capacity options: attempt to alter
capacity to match demand
• Mixed
• Some of each
12-10 Aggregate Planning

Demand Options
• Pricing

• Promotion

• Back orders

• New demand
12-11 Aggregate Planning

Pricing
• Pricing differential are commonly used to shift demand
from peak periods to off-peak periods, for example:
• some hotels offer lower rates for weekend stays
• Some airlines offer lower fares for night travel
• Movie theaters offer reduced rates for matinees
• Some restaurant offer early special menus to shift some of
the heavier dinner demand to an earlier time that
traditionally has less traffic.
• To the extent that pricing is effective, demand will be
shifted so that it correspond more closely to capacity.
• An important factor to consider is the degree of price
elasticity of demand; the more the elasticity, the more
effective pricing will be in influencing demand patterns.
12-12 Aggregate Planning

Promotion
• Advertising and any other forms of promotion,
such as displays and direct marketing, can
sometimes be very effective in shifting demand
so that it conforms more closely to capacity.
• Timing of promotion and knowledge of
response rates and response patterns will be
needed to achieve the desired result.
• There is a risk that promotion can worsen the
condition it was intended to improve, by
bringing in demand at the wrong time.
12-13 Aggregate Planning

Back order
• An organization can shift demand to other periods
by allowing back orders. That is , orders are taken
in one period and deliveries promised for a later
period.
• The success of this approach depends on how
willing the customers are to wait for delivery.
• The cost associated with back orders can be
difficult to pin down since it would include lost
sales, annoyed or disappointed customers, and
perhaps additional paperwork.
12-14 Aggregate Planning

New demand
• Manufacturing firms that experience seasonal
demand are sometimes able to develop a demand
for a complementary product that makes use of the
same production process. For example, the firms
that produce water ski in the summer, produce
snow ski in the winter.
12-15 Aggregate Planning

Capacity Options

• Hire and layoff workers

• Overtime/slack time

• Part-time workers

• Inventories

• Subcontracting (in- out)

12-16 Aggregate Planning

Aggregate Planning Strategies

• Maintain a level workforce

• Maintain a steady output rate
• Match demand period by period
• Use a combination of decision
variables
12-17 Aggregate Planning

Basic Strategies

• Level capacity strategy:

• Maintaining a steady rate of regular-time output
while meeting variations in demand by a
combination of options such as: inventories,
overtime, part-time workers, subcontracting and
back orders.
• Chase demand strategy:
• Matching capacity to demand; the planned output for
a period is set at the expected demand for that
period.
12-18 Aggregate Planning

Chase Approach

• Advantages
• Investment in inventory is low
• Labor utilization is high
• Disadvantages
• The cost of adjusting output rates and/or
workforce levels
12-19 Aggregate Planning

Level Approach
• Advantages
• Stable output rates and workforce levels
• Disadvantages
• Greater inventory costs
• Increased overtime and idle time
• Resource utilizations vary over time
12-20 Aggregate Planning

Techniques for Aggregate Planning

Techniques for aggregate planning are classified
into two categories:
• Informal trial-and-error techniques (frequently
used)
• Mathematical techniques
12-21 Aggregate Planning
A general procedure for Aggregate
Planning
1. Determine demand for each period
2. Determine capacities (regular time, over time, and
subcontracting) for each period
3. Identify policies that are pertinent
4. Determine units costs for regular time, overtime, subcontracting,
holding inventories, back orders, layoffs, and other relevant
costs
5. Develop alternative plans and compute the costs for each
6. Select the best plan that satisfies objectives. Otherwise return to
step 5.
12-22 Aggregate Planning

Cumulative Graph
Figure 12.3
Cumulative output/demand

Cumulative
production
Cumulative
demand

1 2 3 4 5 6 7 8 9 10
12-23 Aggregate Planning

Average Inventory

Average Beginning Inventory + Ending Inventory

=
inventory 2
12-24 Aggregate Planning

Mathematical Techniques

Linear programming: Methods for obtaining optimal

solutions to problems involving allocation of scarce
resources in terms of cost minimization.
Linear decision rule: Optimizing technique that seeks to
minimize combined costs, using a set of cost-
approximating functions to obtain a single quadratic
equation.
Simulation models: Developing a computerized models that
can be tested under a variety of conditions in an attempt
to identify reasonably acceptable (although not always
optimal) solutions to problem.
12-25 Aggregate Planning

Summary of Planning Techniques

Table 12.7

Technique Solution Characteristics

Graphical/chartingTrial and Intuitively appealing, easy to
error understand; solution not
necessarily optim al.
Linear Optim izing Com puterized; linear
program m ing assum ptions not alw ays valid.
Linear Optim izing Com plex, requires considerable
decision rule effort to obtain pertinent cost
inform ation and to construct
m odel; cost assum ptions not
alw ays valid.
Sim ulation Trial and Com puterized m odels can be
error exam ined under a variety of
conditions.
12-26 Aggregate Planning

Linear programming
• Linear programming models are methods for obtaining
optimal solutions to problems involving the allocation of
scarce resources in terms of cost minimization or profit
maximization.
• With aggregate planning, the goal is usually to minimize
the sum of costs related to regular labor time, overtime,
subcontracting, carrying inventory, and cost associated
with changing the size of the workforce. Constraints
involve the capacities of the workforce, inventories, and
subcontracting.
• The aggregate planning problem can be formulated as a
transportation problem (special case of linear
programming.
12-27 Aggregate Planning

Aggregate planning notation

r = regular production cost per unit
t = overtime cost per unit
s = subcontracting per unit
h = holding cost per unit
b = backorder cost per unit per period
n = number of periods in planning horizon
12-28 Aggregate Planning
Transportation notation for aggregate
planning
Period 1 Period 2 Period 3 … Period n Unused capacity
capacity
Period Beginning 0 h 2h (n-1)h 0 I0
inventory
1 Regular r r+h r+2h r+(n-1)h 0 R1
Overtime t t+h t+2h t+(n-1)h 0 O1
subcontract s s+h s+2h s+(n-1)h 0 S1
2 Regular r+b r r+h r+(n-2)h 0 R2
Overtime t+b t t+h t+(n-2)h 0 O2
subcontract s+b s s+h s+(n-2)h 0 S2
3 Regular r+2b r+b r r+(n-3)h 0 R3
Overtime t+2b t+b t t+(n-3)h 0 O3
subcontract s+2b s+b s s+(n-3)h 0 S3
demand D1 D2 D3 Dn total
12-29 Aggregate Planning

notes
• Regular cost, overtime cost, and subcontracting cost are at
their lowest cost when output is consumed in the same
period it is produced.
• If goods are made available in one period but carried over
to later period, holding costs are incurred at the rate of (h)
per period.
• Conversely, with back orders, the unit cost increases as
you move across a row from right to left, beginning at the
intersection of a row and column for the same period.
• Beginning inventory is given a unit cost of 0 if it is used
to satisfy demand in period 1. however, if it is held over
for use in later periods, a holding cost of h per unit is
added for each period.
12-30 Aggregate Planning

Example
• Given the following information set up the problem in a transportation table and
solve for the minimum cost plan.
period
1 2 3
demand 550 700 750
Capacity
Regular 500 500 500
Overtime 50 50 50
subcontract 120 120 100
Beginning inventory 100
Costs
Regular time $60 per unit
Overtime 80 per unit
90 per unit
Subcontract
$1 per unit per month
Inventory carrying cost
$3 per unit per month
Back order cost
12-31 Aggregate Planning

Solution
• The transportation table and solution are shown in the next slide. Some
entries require additional explanation:
a. Inventory carrying cost, h = $1 per unit per period. Hence, units
produced in one period and carried over to a later period will incur a
holding cost that is a linear function of the length of time held.
b. Linear programming models of this type require that supply (capacity)
and demand be equal. A dummy column has been added (nonexistent
capacity) to satisfy that requirement. Since it does not “cost” anything
extra to not use capacity in this case, cell costs of $0 have been
assigned.
c. No backlogs were needed in this example
d. The quantities (e.g., 100, 450 in column 1) are the amounts of output
or inventory that will be used to meet demand requirements. Thus, the
demand of 550 units in period 1 will be met using 100 units from
inventory and 450 obtained from regular time output.
12-32 Aggregate Planning

Initial solution using northwest corner

Period 1 Period 2 Period 3 Unused capacity
capacity
Period Beginning 0 1 2 0 100
inventory 100
1 Regular 450 60 50 61 62 0 500
Total
Overtime 80 50 81 82 0 50 cost is
subcontract 90 120 91 92 0 120 $124910
2 Regular 63 480 60 20 61 0 500
Overtime 83 80 50 81 0 50
subcontract 93 90 120 91 0 120
3 Regular 66 63 500 60 0 500
Overtime 86 83 50 80 0 50
subcontract 96 93 10 90 90 0 100
demand 550 700 750 90 2090
12-33 Aggregate Planning

Optimal solution
Period 1 Period 2 Period 3 Unused capacity
capacity
Period Beginning 0 1 2 0 100
inventory 100
1 Regular 450 60 50 61 62 0 500 Total
cost is
Overtime 80 50 81 82 0 50
subcontract 90 30 91 92 0 120 $124730
90

2 Regular 63 500 60 61 0 500

Overtime 83 50 80 81 0 50
subcontract 93 20 90 100 91 0 120
3 Regular 66 63 500 60 0 500
Overtime 86 83 50 80 0 50
subcontract 96 93 100 90 0 100
demand 550 700 750 90 2090
12-34 Aggregate Planning

Trial and error techniques

• Trial and error approaches consist of developing
simple tables or graphs that enable planners to
visually compare projected demand requirements
with existing capacity.
• Different plans are conducted and evaluated in
terms of their overall costs. The one with the
minimum cost will be chosen.
• The disadvantage of such techniques is that they
do not necessarily result in the optimal aggregate
plan.
12-35 Aggregate Planning

Assumptions
1. The regular output capacity is the same in all periods.
2. Cost ( back order, inventory, subcontracting, etc) is a linear
function composed of unit cost and number of units.
3. Plans are feasible; that is, sufficient inventory capacity exists to
accommodate a plan, subcontractors with appropriate quality and
capacity are standing by, and changes in output can be made as
needed.
4. All costs associated with a decision option can be represented by a
lump sum or by unit costs that are independent of the quantity
involved
5. Cost figures can be reasonably estimated and are constant for the
planning horizon.
6. Inventories are built up and drawn down at a uniform rate and
output occurs at a uniform rate throughout each period.
12-36 Aggregate Planning

Some important relationships

Number of number of number of new number of laid-off
Workers in = workers at end of + workers at start - workers at start of
A period the previous period of the period the period

Inventory inventory production amount used to

At the end of = at the end of + in the - satisfy demand in
A period previous period current period current period

Cost for output cost hire/layoff inventory back order

= + + +
a period (Reg + OT + subcontract) cost cost cost

Average Beginning Inventory + Ending

=
inventory Inventory 2
12-37 Aggregate Planning

Cost calculation
Type of cost How to calculate
Output
Regular Regular cost per unit × Quantity of regular output
Overtime Overtime cost per unit × Overtime quantity
Subcontract Subcontract cost per unit × subcontract quantity
Hire/layoff
Hire Cost per hire × number hired
Layoff Cost per layoff × number laid off
Inventory Carrying cost per unit × average inventory
Back order Back-order cost per unit × number of back order
unit
12-38 Aggregate Planning

Example 1
• Planners for a company that makes several models of skateboards are about to prepare the
aggregate plan that will cover six periods. They now want to evaluate a plan that calls for
a steady rate of regular output, mainly using inventory to absorb the uneven demand but
allowing some backlog. Overtime and subcontracting are not used because they want a
steady output. They intend to start with zero inventory on hand in the first period. Prepare
an aggregate plan and determine its cost using the following information. Assume a level
of output rate of 300 unit per period with regular time. Note that the planned ending
inventory is zero. There are 15 workers, and each can produce 20 units per period.
period 1 2 3 4 5 6 total
forecast 200 200 300 400 500 200 1800

Cost:
Regular time = $2 per skateboard
Overtime = $3 per skateboard
Subcontract = $6 per skateboard
Inventory = $1 per skateboard per period on average inventory
Back orders = $5 per skateboard per period
12-39 Aggregate Planning

Solution: example 1
Period 1 2 3 4 5 6 total
Forecast 200 200 300 400 500 200 1800
Output
Regular 300 300 300 300 300 300 1800
Overtime - - - - - -
Subcontract - - - - - -
Output-forecast 100 100 0 (100) (200) 100 0
Inventory
Beginning 0 100 200 200 100 0
Ending 100 200 200 100 0 0
Average 50 150 200 150 50 0 600
Backlog 0 0 0 0 100 0 100
Cost
Output
Regular $600 600 600 600 600 600 $3600
Overtime - - - - - -
Subcontract - - - - - -
Hire/layoff - - - - - -
Inventory $50 150 200 150 50 0 $600
Back order 0 0 0 0 500 0 $500
Total $650 750 800 750 1150 600 $4700
12-40 Aggregate Planning

Example 2
After reviewing the plan developed in the preceding
example, planners have decided to develop an
alternative plan. They have learned that one is
about to retire from the company. Rather than
replace that person, they would like to stay with
the smaller workforce and use overtime to make
up for lost output. The reduced regular time output
is 280 units per period. The maximum amount of
overtime output per period is 40 units. Develop a
plan and compare it to the previous one.
12-41 Aggregate Planning

Solution: example 2
Period 1 2 3 4 5 6 total
Forecast 200 200 300 400 500 200 1800
Output
Regular 280 280 280 280 280 280 1680
Overtime 0 0 40 40 40 0 120
Subcontract - - - - - -
Output-forecast 80 80 20 (80) (180) 80 0
Inventory
Beginning 0 80 160 180 100 0
Ending 80 160 180 100 0 0
Average 40 120 170 140 50 0 520
Backlog 0 0 0 0 80 0 80
Cost
Output
Regular $560 560 560 560 560 560 $3360
Overtime 0 0 120 120 120 0 360
Subcontract - - - - - -
Hire/layoff - - - - - -
Inventory $40 120 170 140 50 0 $520
Back order 0 0 0 0 400 0 $400
Total $600 680 850 820 1130 560 $4640
12-42 Aggregate Planning

Comment: example 2
• The amount of overtime that must be scheduled has to
make up for lost output of 20 units per period for six
periods, which is 120. this is scheduled toward the center
of the planning horizon since that is where the bulk of
demand occurs. Scheduling it earlier would increase
inventory carrying costs; scheduling it later would
increase backlog cost.
• Overall the total cost for this plan is 44640, which is $60
less than the previous plan.
• Regular time production cost and inventory cost are
down, but there is overtime cost, however, this plan
achieves savings in back order cost, making it somewhat
less costly overall than the plan in example 1
12-43 Aggregate Planning

Aggregate Planning in Services

• Aggregate planning for services takes into account
projected customer demands, equipment, capacities, and
labor capabilities. The resulting plan is a time-phased
projection of service staff requirements.
• Aggregate planning for manufacturing and aggregate
planning for services share similarities in some respect,
but there are some important differences which are:
• Services occur when they are rendered
• Demand for service can be difficult to predict
• Capacity availability can be difficult to predict
• Labor flexibility can be an advantage in services
12-44 Aggregate Planning

Disaggregating the aggregate plan

• For the production plan to be translated into meaningful terms of
production, it is necessary to disaggregate the aggregate plan.
• This means breaking down the aggregate plan into specific product
requirements in order to determine labor requirements (skills, size
of workforce), materials, and inventory requirements.
• To put the aggregate production plan into operation, one must
convert, or decompose, those aggregate units into units of actual
product or services that are to be produced or offered.
• For example, televisions manufacturer may have an aggregate plan
that calls for 200 television in January, 300 in February, and 400 in
March. This company produce 21, 26, and 29 inch TVs, therefore
the 200, 300, and 400 aggregate TVs that are to be produced during
those three months must be translated into specific numbers of TVs
of each type prior to actually purchasing the appropriate materials
and parts, scheduling operations, and planning inventory
requirements.
12-45 Aggregate Planning

Master scheduling
• The result of disaggregating the aggregate plan is a master schedule
showing the quantity and timing of specific end items for a
scheduled horizon, which often covers about six to eight weeks
ahead.
• The master schedule shows the planned output for individual
products rather than an entire product group, along with the timing
of production.
• It should be noted that whereas the aggregate plan covers an interval
of, say, 12 months, the master schedule covers only a portion of this.
In other words, the aggregate plan is disaggregated in stages , or
phases, that may cover a few weeks to two or three months.
• The master schedule contains important information for marketing
as well as for production. It reveals when orders are scheduled for
production and when completed orders are to be shipped.
12-46 Aggregate Planning

Aggregate Plan to Master Schedule

Figure 12.4 Jan Feb Mar.
Aggregate
Planning Aggregate
plan 200 300 400

Disaggregation
Type Jan. Feb. Mar
21 100 100 100
Master inch
Master
schedule 26 75 150 200
inch
Schedule 29 25 50 100
inch
total 200 300 400
12-47 Aggregate Planning

Master Scheduling

• Master schedule
• Determines quantities needed to meet demand
• Interfaces with
• Marketing: it enables marketing to make valid
delivery commitments to warehouse and final
customers.
• Capacity planning: it enables production to evaluate
capacity requirements
• Production planning
• Distribution planning
12-48 Aggregate Planning

Master Scheduler

The duties of the master scheduler generally

include:
• Evaluates impact of new orders

• Provides delivery dates for orders

• Deals with problems such as:

• Production delays
• Revising master schedule

• Insufficient capacity
12-49 Aggregate Planning

Master Scheduling Process

Figure 12.6

Inputs Outputs
Beginning inventory Projected inventory
Master
Forecast Master production schedule
Scheduling

Customer orders Uncommitted inventory

12-50 Aggregate Planning

Master scheduling process

• Master production schedule (MPS): indicates the quantity
and timing of planned production, taking into account
desired delivery quantity and timing as well as on-hand
inventory. The MPS is one of the primary outputs of the
master scheduling process.
• Rough-cut capacity Planning (RCCP): it involves testing
the feasibility of a proposed master relative to available
capacities, to assure that no obvious capacity constraints
exist. This means checking capacities of production
warehouse facilities, labor, and vendors to ensure that no
gross deficiencies exist that will render the master
schedule unworkable
12-51 Aggregate Planning

Master schedule
• Inputs:
• Beginning inventory; which is the actual inventory on
hand from the preceding period of the schedule
• Forecasts for each period demand
• Customer orders; which are quantities already
committed to customers.
• Outputs
• Projected inventory
• Production requirements
• The resulting uncommitted inventory which is referred
to as available-to-promise (ATP) inventory
12-52 Aggregate Planning

Projected On-hand Inventory

Projected on-hand Inventory from Current week’s

inventory
=
previous week
- requirements
12-53 Aggregate Planning

Example: Master Schedule

A company that makes industrial pumps wants to prepare a master
production schedule for June and July. Marketing has forecasted
demand of 120 pumps for June and 160 pumps for July. These have
been evenly distributed over the four weeks in each month: 30 per
week in June and 40 per week in July.
Now suppose that there are currently 64 pumps in inventory (i.e.,
beginning inventory is 64 pumps), and that there are customer
orders that have been committed for the first five weeks (booked)
and must be filled which are 33, 20, 10, 4, and 2 respectively. The
following figure (see next slide) shows the three primary inputs to
the master scheduling process: beginning inventory, the forecast,
and the customer orders that have been committed. This
information is necessary to determine three quantities: the projected
on-hand inventory, the master production schedule (MPS) and the
uncommitted (ATP) inventory. Suppose a production lot size of 70
pumps is used.
Prepare the master Schedule
12-54 Aggregate Planning

Solution: Master schedule

Figure 12.8 The master schedule before MPS
Beginning
Inventory
JUNE JULY
64 1 2 3 4 5 6 7 8
Forecast 30 30 30 30 40 40 40 40
Customer Orders
(committed) 33 20 10 4 2
Projected on-hand
inventory 31 1 -29 Forecast is larger than
Customer orders in week 3

Customer orders are Forecast is larger than

larger than forecast in Customer orders in week 2
week 1
12-55 Aggregate Planning

Solution: The master schedule

• The first step you have to calculate the on hand inventory

Week Inventory from Requirements Net inventory MPS Projected

previous week before MPS inventory

1 64 33 31 31
2 31 30 1 1
3 1 30 -29 70 41
4 41 30 11 11
5 11 40 -29 70 41
6 41 40 1 1
7 1 40 -39 70 31
8 31 40 -9 70 61
12-56 Aggregate Planning

Solution: Master Schedule

• The projected on-hand inventory and MPS are added to the master schedule

Initial inventory June July

1 2 3 4 5 6 7 8
64

Forecast 30 30 30 30 40 40 40 40
Customer orders 33 20 10 4 2
(committed)
Projected on hand 31 1 41 11 41 1 31 61
inventory
MPS 70 70 70 70
Available to 11 56 68 70 70
promise inventory
(uncommitted)
12-57 Aggregate Planning

Notes
• The requirements equals the maximum of the
forecast and the customer orders
• The net inventory before MPS equals the
inventory from previous week minus the
requirements.
• The MPS = run size, will be added when the net
inventory before MPS is negative ( weeks 3, 5, 7,
and 8).
• The projected inventory equals the net inventory
before MPS plus the MPS (70).
12-58 Aggregate Planning

Solution: Master Schedule

•The amount of inventory that is uncommitted, and,
hence, available to promise is calculated as follows:
Sum booked customer orders week by week until
(but not including) a week in which there is an
MPS amount. For example, in the first week, this
procedure results in summing customer orders of
33 (week 1) and 20 (week 2) to obtain 53. in the
first week, this amount is subtracted from the
beginning inventory of 64 pumps plus the MPS
(zero in this case) to obtain the amount that is
available to promise [(64 + 0 – (33 + 20)] = 11
12-59 Aggregate Planning
Time Fences in MPS
Time fences divide a scheduling time horizon into three sections or phases, sometimes
referred as frozen, slushy, and liquid, in reference to the firmness of schedule:
Frozen phase: is the near-term phase that is so soon that delivery of a new order would
be impossible, or only possible using very costly or extraordinary options such as
delaying another delivery.
Slushy phase: is the next phase, and its time fence is usually a few periods beyond the
frozen phase. Order entry in this phase necessitate trade-offs, but is less costly or
disruptive than in frozen phase.
Liquid phase: is the farthest out on the time horizon. New orders or cancellations can be
entered with ease

Period
1 2 3 4 5 6 7 8 9

“frozen” “slushy” “liquid”

(firm or somewhat (open)
Figure 12.12 fixed) firm
12-60 Aggregate Planning

Solved Problems: Problem 1